3 Step Commercial Assessment

Part 1 – Investment Proposal and Business Case Development of the Commonwealth Investments Resource Management Guide supports Commonwealth entities to prepare a detailed business case to support all investment proposals, including a detailed assessment of commercial models and financing approaches.

This 3 Step commercial assessment aims to provide a process for the identification and selection of opportunities, commercial constructs, financing, and risk/reward sharing models.

The 3 step commercial assessment can be used to guide which Government projects are both appropriate and suitable for private sector investment and inform the development, design and evaluation of potential partnership and financing models for government consideration at first pass and will assist with further refinements before second pass consideration.

Related Toolkit Items

To support the development of investment proposals, business cases, and use of the 3 step commercial assessment, the Commonwealth Investment Framework also contains a number of other toolkits including:

Commercial Models providing guides that entities can consider when designing and evaluating options for private sector involvement
Overview of Delivery Vehicles providing a guide on common delivery vehicles available that entities can consider when designing the appropriate management and governance structure to deliver Government investments
Developing a Business Case providing a guide to essential elements of a business case

Links to these and other related resources are located in the right hand menu.

The Investment Framework contact can provide access to a structured template to assist entities to apply the 3 step process and communicate considerations to Government. Contact details are available in the right hand menu.

Overview

This 3 step commercial assessment provides a checklist that entities are to consider as part of investment proposal and business case development. This tool is used to guide the selection and evaluation of projects and to ensure they provide:

clarity on Government’s objectives and key factors and trade-offs that may affect the efficiency and effectiveness of the investment;
options considered to appropriately involve private sector capability and/or capital to improve efficiency and effectiveness of the investment; and
a proposal on how Government’s interest is best structured and managed to serve Government’s objectives when Government is directly involved inexecution of the investment and/or ownership of the resultant asset.

While the 3 step commercial assessment tool generally progresses sequentially, the process can be iterative and partnership models in particular may require revision and adjustment if they do not allow for optimal financing solutions.

Projects can then commence detailed design, approvals and go-to-market process suited to the underlying asset and portfolio (for example, governed by the Commonwealth Procurement Rules).

Investment Instruments

Non-grant financing using the right investment instrument can provide benefits to the Government including increased involvement in project delivery decision-making, the opportunity to build and recycle capital and the opportunity to better allocate risk between parties.

Characteristics of investment instruments

There are a number of considerations to be balanced in determining the most appropriate non-grant financing option (or blend of options). The pros and cons outlined for each option listed below are assessed from the perspective of the Government taking the role as investor.

The stated policy objectives of the project or program will help guide which considerations carry the greatest weight.

Investment Instrument	Equity Injection Part-Ownership	Equity Injection 100% Ownership by Holder of Instrument	Guarantee	Commercial Loan Market Gap Finance	Concessional Loan	Convertible Instrument (bought by Government)	Derivative issued by Government
Ability to influence financed objective Ability for the holder of instrument to provide direction in relation to the investment	Medium control	High control	Low control	Medium control – depends on loan conditions	Medium control – depends on loan conditions	Medium-high control – depends on if equity feature is exercised	Medium-high control – depends on whether the derivative is traded on an exchange and the nature of the derivative.
Level of market intervention The significance of the intervention in the market and how determinative the instrument will be on future market conditions	Medium intervention	High intervention	Low-medium intervention – depends on the value of the risk guaranteed	Medium intervention	Medium intervention	Medium-high intervention	Low-high intervention – depends on the nature of the derivative.
Commercial discipline incentive The financial discipline achieved through the structure of the investment	Low-medium incentive	Low-medium incentive	Low incentive	High incentive	Medium-high incentive	High incentive	Medium incentive
Certainty of financial return Probability of the investment making a financial return	Low certainty	Low certainty	Nil or high certainty (if fee charged)	High certainty	High certainty	Low-high certainty – depends on if equity feature is exercised	Nil-low certainty – depends on whether derivative is exercised and recoverability of upfront cost of derivative.
Opportunity to realise upside gain The ability for the financier to benefit from over performance	Medium-high capacity	High capacity	Nil capacity	Nil capacity	Nil capacity	High capacity	Nil-high capacity – depends on market state relative to nature of the derivative.
Level of financial risk The potential loss of the investment instrument	High risk	High risk	Medium risk	Medium risk	Medium risk	Medium-high risk – depends on if equity feature is exercised	Low-high risk – depends on nature of derivative, whether derivative is exercised and recoverability of derivative’s upfront cost.
Security of asset The reduction of financial risk that can be achieved through the ability to structure the instrument	Low security	Low security	Nil security	High security	High security	Medium security	Nil security
Administration cost Governance and management costs of the investment	High administration	High administration	Low administration however Medium-high if called	Medium administration	Medium administration	Medium-high – depends on if equity feature is exercised	Medium administration

Equity: involves the Government taking an ownership interest in an entity in anticipation of future financial returns. Having the Government as an equity partner can reduce costs and risks for private investors. Alternatively, the Government may be the sole owner at the early stages of greenfield projects but bring in private investment once a project is more mature and less risky. In general, equity investment requires that the Government has a higher tolerance for risk and making a loss than other investments like loans. For example, the Government provided Western Sydney Airport (WSA Co) equity in exchange for ordinary shares. WSA Co only has fully paid ordinary shares in issue, all of which are owned by the Commonwealth.

Commercial Loans: supports projects and priorities as a debt partner until projects are sufficiently developed to be wholly supported by private sector financing. Government debt financing is generally used to bridge a commercial market finance gap. For example, the Government provided a loan on commercial terms to NBN Co so it could focus on the remaining rollout as it significantly scaled up toward completion in 2020.

Guarantees: involves the Government taking on financial obligations if certain risks eventuate. Government guarantees reduce the risk to private sector partners and can strengthen a project’s credit profile to attract private sector financing instead of Government financing. For example, the Government provides guarantees through the Accommodation Payment Guarantee Scheme for the repayment of aged care residents’ refundable accommodation payments if the approved provider becomes insolvent or bankrupt and defaults on its refund obligations.

Concessional Loans: can be provided when a proposal is expected to generate some financial return, but private financing is either unavailable or unaffordable. Features of concessional loans include more favourable terms than terms offered by private debt markets. For example, the Commonwealth provides a concessional loan facility to a company wholly owned by the Sydney Motorway Corporation to finance a motorway.

Convertibles: are hybrid financial instruments that contain debt and equity features. The debt feature yields fixed-interest payments, and the equity feature provides the holder of the convertible the right but not the obligation to convert the convertible into a predetermined number of shares.

Derivatives: A contract whose value is based on an underlying financial asset, index or security. Derivatives can be traded privately (over-the-counter) or on an exchange. A derivative facilitates the ability for Government to influence strategic delivery of policy objectives as well as provides hedging on Government initiatives exposed to market risks.

Budget classification

In addition to guidance provided in RMG-117 General principles for the recognition of expenditure in budget aggregates, the below table sets out the implications different investments instruments have on key Budget aggregates.

Note - the PDI impacts are reported as a consolidated line item at the Whole-of-Government level.

Related Toolkit Items

Overview

Investment Instruments

Characteristics of investment instruments

Budget classification

Related Resources